Financial Sector Restructuring : Visiting History

History never repeats itself but does it really rhyme? I have been reflecting on ‘those who cannot remember the past are condemned to repeat it’.  In 2020 I examined 10 historical financial sector restructurings across USA, Sweden, Korea, Malaysia, France, Japan – the contagion, the transmission mechanism as well as government interventions. Having had the privilege of a ringside seat, as well as participated in some of these events, this reflection has helped me connect multiple dots. I hope you find it useful too.

History Lesson: How Did the 2008 Crisis Spread in the U.S.?

History never repeats itself but does it really rhyme? As one who lived through the 2008 global financial crisis I have been reflecting on ‘those who cannot remember the past are condemned to repeat it’.  To seek lessons, I recreate the broad building blocks of the ’08 crisis. The contagion, the transmission mechanism as well as government interventions. The financial crisis was a lot more complex than the coronacrisis. This visual built off my research, that I hope to expatiate on forthcoming, speaks a thousand words.

How did the 2008 crisis spread in the US

 

History Lesson: How Did European Banking System Recover After 2008?

#ActiveAllocator Research- responding to WSJ article today Tue, May 26, B1 ‘European Banks Exposed to Sudden Downturn’. We examined the events affecting the European Banking sector during the 2008 crisis and identified key drivers of recovery. They raised capital, increased liquidity, reduced their U.S. structured credit exposure and relied on the economy to recover to reduce non-performing loans. We opine that they now need to build capital (and cut balance sheets) from recent levels, take account of an increasing level of loan losses, not just from problems emerging to date from the crisis, but over the course of a developing economic down-turn.

While governments have rightly stood behind European banks, these banks are still in a weaker position, relative to their American counterparts, due to past capital policy – with the shock of coronacrisis led events posing risks to damaging market confidence and trust. The effective closure of mainstream sectors of economy is a major issue for banks, and may call for further intervention. In the longer term banking models are likely to change (a reversion to tradition?) under taxpayer-shareholder and regulatory pressure – but reforms need to be introduced at a measured pace for fear of further unbalancing.

15-european banks recovery

History Lesson in Distress: Japanese Bank Restructuring

10-japan

While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Japan resolved its own crisis.

History Lesson in Distress: French Bail-out of Crédit Lyonnais (1995)

8-credit lyonnais9-credit lyonnaise timeline

While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way France resolved its own crisis. An example was the Credit Lyonnais bailout.

History Lesson in Distress: Malaysian Bank Restructuring

6-malaysian7-malaysia banks

While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Malaysia resolved its own crisis.

History Lesson in Distress: Korea Asset Management Corporation

5-kamco

While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Korea resolved its own crisis. An example here of the KAMCO bailout.

History Lesson in Distress: Korean Banking Crisis (1997-99)

4-korean

While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Korea resolved its own crisis.

History Lesson in Distress: Restructuring Nordbanken and Gotha

3-nordbanken

While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Sweden resolved its own crisis. And example here of how it restructured some large banks.

Financial Sector Distress – Restructuring and Common Solutions

1-common solutions

 

#ActiveAllocator Research – If the corporate sector is increasingly distressed, won’t the financial sector follow? Historically, governments have used a variety of tools to address financial crisis and recessions with policies of either containment or resolution. For example, in 2008, government intervention moved from the provision of short-term liquidity, through distressed asset funds to medium-term guarantees to full-scale bank capital injections, nationalization and brokered rescues. Whilst the banking system seems secure in the coronacrisis, I think it is inevitable that governments will borrow from previous playbooks.

As one who was a front row participant in the 2008 crisis here are some of my takeaways to what may be an inevitable sector restructuring – if not in the U.S., then most certainly in many countries where the contagion is already spreading from the real to the financial sector.